COST AND MANAGEMENT ACCOUNTING 2

1

Introduction to Managerial
Accounting and Business

Environment

NOR AIN SOLIHAH MOHD RAZALI

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This e-book is a lecture note for
the first topic for Cost and
Management Accounting II,
introduction to Management
Accounting and Business
Environment.

This e-book is suitable for all
Polytechnic students who take this
course especially for Diploma in
Accounting Management.

Thank you.

Nor Ain Solihah Mohd Razali

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Table of Contents 2
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1. Management strategies in the contemporary business process 5
5
a. The balanced scorecard and strategy map …………… 6
b. The value chain ………………………………………. 7
c. Activity based costing and management …………… 8
d. Target costing …………………………………………… 9
e. Life-cycle costing ………………………………………
f. Total quality management ……………………………… 10
g. Lean accounting …………………………………………
h. Learning curve theory ………………………………… 11

2. Management accounting information 12
12
a. Definition ………………………………………………… 12
b. Importance of management accounting information to 12
12
management in decision making process ………………… 12
c. Characteristics of an effective management accounting

information system:
a. Relevant …………………………………
b. Understandable …………………………
c. Timely ………………………………….
d. Comparable ……………………………..
e. Reliable and complete ……………………
f. Cost-benefit features …………………….

3. Ethic in business based on Institute of Management Accountants (IMA) … 13-15
Sample questions 16
References

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1.1 NATURE OF COST AND MANAGEMENT ACCOUNTING IN THE
GLOBALIZATION MANAGEMENT ENVIRONMENT
1.1.1 Management strategies in the contemporary business process

a) The balanced scorecard and strategy map
b) The value chain
c) Activity based costing and management
d) Target costing
e) Life-cycle costing
f) Total quality management
g) Lean accounting
h) Learning curve theory

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1.1.1 Management strategies in the contemporary business process

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1 The balanced scorecard and strategy map

The balanced scorecard translate an organization’s mission and
strategy into a comprehensive set of performance measures that
provides the framework for implementing its strategy. It covers 4
perspectives:
Financial perspective
Customer perspective
Internal business process perspective
Learning and growth perspective

(Horngren, Foster & Datar , 2000)

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1.1.1 Management strategies in the contemporary business process
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2 The value chain

The value chain comprises activities carried out by firms in any
industry can be grouped into nine generic categories indicated. At each
level of the value chain there is an opportunity to contribute positively
to the firm's competitiveness strategy by performing some activities or
processes in a way that is better than and/or different from a
competitor's offering, and thus provides some uniqueness or advantage.
If a firm achieves such a competitive advantage, which is sustainable,
agreeable, profitable and valued by the market, then it may get a high
rate of return.
The value chain includes both cost and value drives. A firm is profitable
if the value of being held captive exceeds the costs involved in creating
a product. Creating value for buyers who exceed the cost of doing so is
the goal of any generic strategy. Suppliers, firms themselves and
business customers all have their own value chain, starting from basic
raw materials and going directly to those involved in the delivery of
end products and services to end customers. Value activities can be
divided into two broad types, primary activities and support activities.
(Hollensen, S. , 2020)

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(Michael E. Porter,1985)

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1.1.1 Management strategies in the contemporary business process

3 Activity based costing and management

Activity based costing (ABC) is a method of assigning indirect
cost to product or services based on the activities they
required. Activity based management (ABM) encompasses all
the action that managers take to improve operation or reduce
cost based on the ABC data.

(Whitecotton, Libby & Philips , 2011)

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1.1.1 Management strategies in the contemporary business process 8

4 Target costing

Target costing is to determine what is the target cost should be to
meet the market price and still provide the profit for the company’s
shareholder. Its also called as cost planning because its requires
managers to think about costs up front so that that can design and
manufacture product at a cost that will satisfy both customers and
shareholders.

Target cost should reflect all of the costs that will be incurred across
the entire value.

(Whitecotton, Libby & Philips , 2011)

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5

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1.1.1 Management strategies in the contemporary business process

5 Life-cycle costing

Life cycle costing, or whole-life costing, is the process of
estimating how much money you will spend on an asset over
the course of its useful life. Whole-life costing covers an asset’s
costs from the time you purchase it to the time you get rid of it.

(Rachel Blakely-Gray , 2018)

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1.1.1 Management strategies in the contemporary business process 10

6 Total quality management

Total Quality Management (TQM) is an enhancement to the
traditional way of doing business. It is a proven technique to
guarantee survival in world-class competition. Only by changing
the actions of management will the culture and actions of an entire
organization be transformed. TQM is for the most part common
sense. Analyzing the three words, we have:

Total—Made up of the whole.
Quality—Degree of excellence a product or service provides.
Management—Act, art, or manner of handling, controlling,

directing, etc.

Therefore, TQM is the art of managing the whole to achieve
excellence. TQM is defined as both a philosophy and a set of
guiding principles that represent the foundation of a continuously
improving organization. It is the application of quantitative
methods and human resources to improve all the processes within
an organization and exceed customer needs now and in the future.
TQM integrates fundamental management techniques, existing
improvement efforts, and technical tools under a disciplined
approach.

Dale H, Carol, Glen H., Mary, hemant & Rashmi , 2012)

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(

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1.1.1 Management strategies in the contemporary business process 11

7 Lean accounting

Lean accounting is streamlining accounting processes within a
company to maximize productivity, service, quality, and profit.

Lean accounting involves several ‘lean practices’ which are used to
reduce wasted time and resources. Lean practices are not related to
reporting requirements, tax regulations, and compliance, but rather
to internal processes that are improving overall accounting
department.

Vision for Lean Accounting:
1. Provide accurate, timely, and understandable information to
motivate the lean transformation throughout the organization,
and for decision-making leading to increased customer value,
growth, profitability, and cash flow.
2. Use lean tools to eliminate waste from the accounting
processes while maintaining thorough financial control.
3. Fully comply with generally accepted accounting principles
(GAAP), external reporting regulations, and internal reporting
requirements.
4. Support the lean culture by motivating investment in people,
providing information that is relevant and actionable, and
empowering continuous improvement at every level of the
organization.

(Brian H. Maskell and Bruce L. Baggaley , 2006)

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1.1.1 Management strategies in the contemporary business process 12

8 Learning curve theory

Learning curves enable managers to project the manufacturing cost
per unit for any cumulative production quantity. Firms that choose to
emphasize low price as a competitive strategy rely on high volumes to
maintain profit margins. These firms strive to move down the learning
curve (lower labor hours per unit or lower costs per unit) by
increasing volume. This tactic makes entry into a market by
competitors difficult. For example, in the electronics component
industry, the cost of developing an integrated circuit is so large that
the first units produced must be priced high. As cumulative
production increases, costs (and prices) fall. The first companies in the
market have a big advantage because newcomers must start selling at
lower prices and suffer large initial losses.

The vertical axis of a learning curve represents the rate of learning,
while the horizontal axis represents the volume or duration of
experience.

The learning curve is also known as an experience curve.

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(Krajewski & Ritzman , 2004)

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1.2 MANAGEMENT ACCOUNTING INFORMATION 13

1.2.1 Define management accounting information

In management accounting or Management accounting For Example,
managerial accounting, managers information is a key source management accounting
use the provisions of accounting of information for decision- information includes the
information in order to better making, improvement and reported expense of an
inform themselves before they control in organizations. operating department,
decide matters within their the cost of the producing
organizations, which aids their a product, the cost of
management and performance of delivering as service, or
control functions. location or place of
product, the cost of
Management accounting is the performing an activity or
process of using all the accounting business process, such as
data available to make better creating a customer
business decisions based on trends invoice and the costs of
and facts (Noraihan et. al , 2017). serving a customer.

Management accounting provides
information that helps manager
make better decision and focus on
relevance to business decisions and
future orientation (Oliver &
Horngren , 2010).

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1.2 MANAGEMENT ACCOUNTING INFORMATION 14

1.2.2 Importance of management accounting information to management in
decision making process

Relevant Cost Activity-based Make or Buy Utilizing the Data
Analysis Costing Techniques Analysis

Managerial accounting Once the company has A primary use of Managerial accounting
information is used by
company management determined what managerial accounting information provides a
to determine what
should be sold and how products to sell, the information is to data-driven look at how
to sell it. For example, a
small business owner business needs to provide information to grow a small
may be unsure where
he should focus his determine to whom used in manufacturing. business. Budgeting,
marketing efforts. To
evaluate this decision, they should sell the For example, a small financial statement
an accounting manager
could examine the costs products. By using business owner may be projections, and
that differ between
advertising alternatives activity-based costing considering whether to balanced scorecards are
for each product,
ignoring common costs. techniques, small make or buy a just a few examples of
This process is known as
relevant cost analysis business management component needed to how managerial
and is a technique that
is taught in basic can determine the manufacture the accounting information
managerial accounting
courses. The same activities required to company's primary is used to provide
process can be used to
determine whether to produce and service a product. By completing information to help
add product lines or
discontinue operations. product line. Embedded a make or buy analysis, management guide the

in this information is she can determine future of a company. By

the cost of customers. which choice is more focusing on this data,

Deciding which profitable. While this managers can make

customers are more or technique is certainly decisions that aim for

less profitable allows the useful, small business continuous

business owner to focus owners should only use improvement and are

advertising toward the these analyses as a factor justifiable based on

consumers who are the in the decision. There intelligent analysis of

most profitable. could be other non- the company data, as

financial metrics that opposed to gut feelings.

are important to

consider that would not

be part of the analysis..

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1.2 MANAGEMENT ACCOUNTING INFORMATION 15

1.2.3 Characteristics of Management Accounting Information

1 Relevant information is information that is directly related to business need. Managers need
Relevant to consider only relevant information to assist them in making decision. Two criteria for
relevant information:

1)Future orientation/future information - Future information is deal for planning and
setting the goals of the company.

2)All the information must have alternatives – the managers must have options to decide
which is the best among all available alternatives.

2 Reliable information is information that you can believe as being correct. It
Reliable will be from a valid and trusted source. For example, reliable information
would be sales or revenue figures for last month from sales department that
is supplied to the finance department.

Information that is used for 3 4 The information must be provided to
a business purpose needs to Understandable Timely the user in a timely manner. When
be understandable by the critical information is received late,
end user. Since the the appropriate action cannot be
information is already in a taken in a timely manner.
summarized form, it must be
understood by the receiver Scan Me!
or users so that they will
interpret it correctly. 5

Management accounting information is often used to make Comparable
comparisons. For example, in comparing the performance
of one department with another department, the same
period must be used.

Cost benefit or effective information is worth investing time and money in, 6

because it helps management to make informed business decisions. The

preparation of accounting information involves collecting, analyzing and Cost Benefit or Effective

interpreting data.

(Noraihan, Marlina, Shaharoni, Sabrina & Nor Lailihuda , 2017)

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1.3 IMPORTANCE OF ETHICS IN BUSINESS 16

1.3.1 Discuss the code of conduct for management accountants
based on Institute of Management Accountants (IMA)

Ethics is an important part of managerial
accounting, and companies follow a code of ethics
or conduct that addresses ethical issues/concerns
for management accountants. The ethical
dilemmas of managerial accountants are increasing
in response to big data, artificial intelligence and
other technologies, as reported in the September
2019 issue of the CPA Journal. Ethical codes of
professional organizations provide helpful
guidance.

Institute of Management Accountants (IMA)
The Institute of Management Accountants (IMA)
is a professional organization responsible for
creating managerial accounting guidelines. The
IMA provides managerial accounting ethics for
licensed accountants, and non-licensed
accountants also can use these ethical standards to
govern their accounting career. The IMA's ethical
principles are based on honesty, fairness,
objectivity and responsibility. IMA members must
use these ethical principles when engaging in
accounting services for their company and the
general public.

IMA Professional Standards
The IMA stresses four standards of ethical conduct
for management accountants. IMA Statement of
Ethical Professional Practice examples define how
accountants should conduct themselves in their
daily business affairs.

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1.3 IMPORTANCE OF ETHICS IN BUSINESS 17

1.3.1 Discuss the code of conduct for management accountants
based on Institute of Management Accountants (IMA)

Each member has a Competence Credibility •Each member has a
responsibility to : responsibility to:

1.Maintain an appropriate level 1. Communicate information
of professional expertise by fairly and objectively.
continually developing
knowledge and skills. 2. Disclose all relevant
information that could
2.Perform professional duties in reasonably be expected to
accordance with relevant laws, influence an intended user’s
regulations and technical understanding of the reports.
standards. analyses or recommendations.

3.Provide decision support 3. Disclose delays or deficiency
information and in information, timeliness,
recommendations that are processing, or internal control
accurate, clear, concise and in conformance with
timely. organization policy and/or
applicable law.
4.Recognize and communicate
professional limitations or
other constraints that would
preclude responsible
judgement or successful
performance of an activity.

Each member has a Confidentiality Integrity •Each member has a
responsibility to: Scan Me! responsibility to:

1.Keep Information confidential 1. Mitigate actual conflicts of
except when disclosure is interest, regularly
authorized or legally required. communicate with business
associates to avoid apparent
2.Inform all relevant parties conflicts of interest. Advise all
regarding appropriate use of parties of any potential
confidential information. conflicts.
Monitor subordinates’
activities to ensure 2. Refrain from engaging in any
compliance. conduct that would prejudice
carrying out duties ethically.
3.Refrain from using
confidential information for 3. Abstain from engaging in or
unethical or illegal advantage. supporting any activity that
might discredit the profession.

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(Oliver & Horngren , 2010)

1.3 IMPORTANCE OF ETHICS IN BUSINESS 18

1.3.1 Discuss the code of conduct for management accountants
based on Institute of Management Accountants (IMA)

Managerial ethics ensure that all financial information is reported to business
owners, directors or managers. Accountants who fail to report negative information
or use a company's internal financial information for personal gain can create serious
legal situations for businesses. Business owners often require all information,
whether good or bad, when reviewing business operations and making decisions.
Accounting ethics also ensure that each employee can be trusted with sensitive
business information.

Circumventing Unethical Behavior
Companies may choose to act unethically in the business environment. Business
owners may determine that unethical behavior is not necessarily illegal, a logic that
creates a gray-shaded area in business. Managerial accountants constantly may push
ethical limits when recording and reporting financial information. Companies should
provide detailed explanations to those conducting external audits regarding
questionable accounting procedures to ensure adherence to IMA standards of
practice.

Consequences of Unethical Actions
Accountants who fail to abide by the IMA's accounting ethical code face a variety of
punishments. Accountants may lose their professional certification, be removed from
accounting positions and face legal penalties depending on their inappropriate
actions. Managerial accountants who do not disclose inappropriate accounting
operations in their company also can be held liable. Maintaining the general public's
trust in companies is a primary responsibility of managerial accountants.

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SAMPLE OF QUESTIONS 19

1. List some of the management strategies in the contemporary
business process .

2. Explain what is the balanced scorecard and strategy map.
3. Briefly explain what is the value chain.
4. What is Life-cycle costing?
5. Discuss what is lean accounting.
6. Define management accounting information.
7. What is characteristics of management accounting information?
8. Why the management accounting information must be

comparable?
9. Explain what is the relevant information in management

accounting.
10. Discuss ethics based on Institute of Management Accountants

(IMA)

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REFERENCES 20

Brian H. Maskell and Bruce L. Baggaley (2006). Lean Accounting: What's It
All About?. Retrieved from
https://www.ame.org/sites/default/files/target_articles/06-22-1-
Lean_Accounting.pdf

Dale H, Carol, Glen H., Mary, hemant & Rashmi (2012). Total Quality
Management. New Delhi, India. Pearson.

Hollensen, S. (2020). Global Marketing, 8th Edition, Pearson Education.
Chapter 1.

Horngren, Foster & Datar (2000). Cost Accounting A Mangerial emphasis.
New Jersey. Prentice Hall International Inc.

Krajewski & Ritzman (2004) . Operations Management: Strategy and
Analysis, Seventh Edition . New Jersey. Prentice Hall, Inc.

Noraihan, Marlina, Shaharoni, Sabrina & Nor Lailihuda (2017). Cost and
Management Accounting. Selangor. Oxford Fajar.

Oliver & Horngren (2010). Managerial Accounting. New Jersey. Pearson.

Rachel Blakely Gray (2018). How to Use Life Cycle Costing. Retrieved from
https://www.patriotsoftware.com/blog/accounting/life-cycle-
costing-process/

Whitecotton, Libby & Philips (2011). Managerial Accounting. New York .
Mc Graw Hill